McColls must be the only major grocery chain out there not to have benefited from the pandemic. And it’s now officially a penny share with the price plummeting to a new low of 1.43p this week following a report at the weekend on Sky News that, without an injection of new funding or a potential buyer emerging, McColl’s risked collapse within just a few weeks.
The situation is perilous, with “vultures circling” according to one convenience source. The Grocer understands the business remains optimistic that it will be able to secure the necessary funding to avoid administration, but there is little doubt McColl’s is in a race against time to convince its lenders it is on the right path and therefore worth continuing to back.
In response to the weekend press coverage, McColl’s issued a statement yesterday confirming it remained in discussions with its lending banks with the aim of reaching a longer-term agreement in relation to the balance of its c£170m debt facility. Crucially, the statement added that it had “received the necessary agreement to roll forward its financial covenant test periodically, and continues to receive credit support from its key commercial partner, Morrisons, to enable these discussions”. It also “continues to believe that a financing solution will be found that involves its existing partners and stakeholders”, it said.
At the same time it’s also exploring alternative options. Significantly, the statement confirmed McColl’s had received an offer for the whole business but this had been withdrawn and no further talks about a full sale had taken place. It is understood the interested party was Asda’s new owners the Issa brothers and TDR Capital. McColl’s has also received indications of interest for parts of the business. The retailer said it would “consider all options with the aim of maximising value for all stakeholders”.
While a continuation of the current operations is clearly still the board’s preferred plan, a compelling bid for part of the business would need serious consideration. It is likely that the most attractive element of McColl’s will be the 170 stores already converted to the Morrisons Daily format and those earmarked for conversion. McColl’s raised around £30m last year to fund an accelerated conversion programme that will see it operating 450 of its 1,200-strong estate under the Morrisons fascia by November.
McColl’s said this week that it remained on track to hit this target – an ambitious timetable. Its statement said the Morrisons Daily stores “are delivering like-for-like sales growth that is at least 20% better than non-converted, comparable stores, and ahead of the total convenience market”. However, it also said at group level McColl’s delivered two-year like-for-like sales growth of 5.9% in the 11 weeks to 13 February 2022, in line with the neighbourhood convenience market.
But if it’s only in line with the market and the conversions are doing so much better then there must be a significant drag from the other stores, which must be making lenders jittery. To be ready to pump millions into the business, its current lenders or potential new ones will no doubt want that business to be performing far better than the market in terms of sales.
This is the big challenge and hopefully not an insurmountable one. Having visited the Morrisons Daily stores and many McColl’s stores in the past, the transformation is striking. They are modern food-focused convenience stores on a level with some of the best in the business. CEO Jonathan Miller, who is understood to have personally invested about £3m in last summer’s fundraising, indicated last year that he believed there was scope to take the number of conversions well past the current target. The issue is that to do this requires significant investment and this will require support from the lenders.
McColl’s added this week it was in the process of finalising its full-year results, but now expects to publish in May 2022 to allow additional time for banking discussions to conclude. It is clear that the outcome of the negotiations over the next few weeks will be pivotal to the shape and strategy of McColl’s and indeed to the very future of the convenience sector.
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